5 Signs Your Business is Growing Well
By Mike Plotnick, Staples® Contributing Writer
Ushering a business from idea to long-term success is no walk in the park. Grow too quickly and you risk depleting your resources or not being able to keep up with customer demand. Expand too slowly and the business could stagnate and lose out on lucrative opportunities.
While there’s no universal formula for determining optimal growth, Ruth King, a financial consultant in Atlanta, GA, recommends calculating your working capital turnover ratio by dividing annualized sales by working capital. If the result equals 10, it’s a good indication the business is growing at an ideal rate.
“Anything over 10 and you are growing too fast,” she says. “It’s OK to be under 10, but if your business isn’t at least keeping pace with the rate of inflation, it is going backward.”
Here are five telltale signs your business is growing effectively — and a few ways to change course if you’re not.
1. Cash flow guides your decisions.
Experts agree that growth should be guided by a business’s ability to generate and manage cash, not simply by making a profit.
“Profit just says that a company had more revenue than expenses in a month,” King notes. “But as a company grows, its cash is eaten up by additional overhead, bigger receivables and more inventory. Profitable companies can grow themselves out of business.”
She suggests creating a weekly cash flow report to assess growth rate. “It takes less than 15 minutes to produce and lets you know if the company, at a minimum, can pay its bills — including payroll — the following week.”
2. You have a roadmap.
A strategic business plan and budget are essential tools for charting business growth.
“A lot of small business owners are hesitant to put together a roadmap because they’re concerned that if they don’t meet it, it means they’re a failure,” says Scott Coup, president of business banking at Enterprise Bank & Trust in Olathe, KS. “I’ve been doing this for 20 years and I have yet to see someone hit a business plan right on the nail. But those who don’t have a plan are not likely to be in business very long.”
He advises business owners to continually adapt their business plans to reflect evolving client developments as well as the competitive landscape and economic environment.
3. Efficiency is your focus.
Having a narrow fixation on boosting sales figures can actually limit your growth potential.
“Growing a business isn’t necessarily about growing top-line revenue; it may be about looking for opportunities to improve efficiencies and processes to increase your net profit margin,” Coup says.
“Just growing the top-line revenue number is difficult unless the business offers something truly unique in the marketplace,” he says. “Otherwise, you’re just stealing customers from somebody else, which is much harder to do than it is to improve your efficiency.”
Look for new ways to create value for existing and new customers as a means of growing customer loyalty and your bottom line.
4. You adapt to new business opportunities.
Often, the excitement of landing a significant new client can overshadow the importance of considering the financial impact of needing to purchase more inventory, hire more people or manage less-than-ideal payment terms.
“If your average receivables go from 30 days to 60 days, the company must fund the additional 30 days of expenses while they are waiting to be paid,” King says.
That scenario is familiar to Todd Lindenbaum, CEO of SuiteHop, a Denver, CO–based online marketplace for luxury suites. He modified his cash management strategies to accommodate a large client that pays very slowly. “One of my current roles is lining up short-term financing to help us bridge the gap so that we don’t have to turn away what is really a transformative opportunity for the business,” he says.
5. You seek wise counsel.
Business owners benefit from the advice of accountants, bankers, attorneys and other specialists who provide expertise to support smart growth.
“Investing in good advice on the front end will end up being more cost effective than not spending the money and trying to fix a problem that arises from a blind spot that could have been avoided,” Lindenbaum says.
Coup suggests small businesses create an advisory board of successful business owners, and to benchmark your enterprise against peer businesses to identify new ideas and best practices.
“There isn’t one right way to grow a business,” he says. “We come across a lot of companies that do it right, but they all do it differently. The right way is the way you’re doing it as long as you’re doing it profitably and in a way that fits your goals and lifestyle.”